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Limits to Arbitrage when Market Participation Is Restricted

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  • Thorsten Hens
  • P. Jean-Jacques Herings
  • Arkadi Predtetchinskii

Abstract

There is an extensive literature claiming that it is often difficult to make use of arbitrage opportunities in nancial markets. This paper provides a new reason why existing arbitrage opportunities might not be seized. We consider a world with short-lived securities, no short-selling constraints and no transaction costs. We show that to exploit all existing arbitrage opportunities, traders should pay attention to all nancial markets simultaneously. It gives a general result stating that failure to do so will leave some arbitrage oppor- tunies unexploited with probability one.

Suggested Citation

  • Thorsten Hens & P. Jean-Jacques Herings & Arkadi Predtetchinskii, "undated". "Limits to Arbitrage when Market Participation Is Restricted," IEW - Working Papers 176, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:176
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    Cited by:

    1. Bernard Cornet & Ramu Gopalan, 2010. "Arbitrage and equilibrium with portfolio constraints," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 45(1), pages 227-252, October.
    2. Carosi, Laura & Gori, Michele & Villanacci, Antonio, 2009. "Endogenous restricted participation in general financial equilibrium," Journal of Mathematical Economics, Elsevier, vol. 45(12), pages 787-806, December.
    3. Karlo Kauko, 2005. "Bank interest rates in a small European economy: Some exploratory macro level analyses using Finnish data," Finance 0508020, University Library of Munich, Germany.
    4. Anthropelos, Michail & Kardaras, Constantinos, 2024. "Price impact under heterogeneous beliefs and restricted participation," Journal of Economic Theory, Elsevier, vol. 215(C).
    5. Bruno S. Frey & Simon Luechinger & Alois Stutzer, 2007. "Calculating Tragedy: Assessing The Costs Of Terrorism," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 1-24, February.
    6. Gori, Michele & Pireddu, Marina & Villanacci, Antonio, 2013. "Regularity and Pareto improving on financial equilibria with price-dependent borrowing restrictions," Research in Economics, Elsevier, vol. 67(1), pages 100-110.
    7. Bruno Frey, 2005. "‘‘Just forget it.’’ Memory distortions as bounded rationality," Mind & Society: Cognitive Studies in Economics and Social Sciences, Springer;Fondazione Rosselli, vol. 4(1), pages 13-25, June.
    8. Jiří Gregor & Aleš Melecký & Martin Melecký, 2021. "Interest Rate Pass‐Through: A Meta‐Analysis Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 35(1), pages 141-191, February.
    9. Michele Gori & Marina Pireddu & Antonio Villanacci, 2010. "Regularity and Pareto Improving on financial equilibria with endogenous borrowing restrictions," Working Papers - Mathematical Economics 2010-08, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa, revised Aug 2012.
    10. Knaut, Andreas & Paschmann, Martin, 2017. "Decoding Restricted Participation in Sequential Electricity Markets," EWI Working Papers 2017-5, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI), revised 31 Aug 2017.
    11. Laurence Carassus, 2021. "No free lunch for markets with multiple num\'eraires," Papers 2107.12885, arXiv.org, revised Dec 2022.
    12. John Simpson, 2010. "Were there warning signals from banking sectors for the 2008/2009 global financial crisis?," Applied Financial Economics, Taylor & Francis Journals, vol. 20(1-2), pages 45-61.
    13. Alasdair Brown, 2013. "Information Acquisition in Ostensibly Efficient Markets," University of East Anglia Applied and Financial Economics Working Paper Series 043, School of Economics, University of East Anglia, Norwich, UK..
    14. Carassus, Laurence, 2023. "No free lunch for markets with multiple numéraires," Journal of Mathematical Economics, Elsevier, vol. 104(C).
    15. Michail Anthropelos & Constantinos Kardaras, 2018. "Price Impact Under Heterogeneous Beliefs and Restricted Participation," Papers 1802.09954, arXiv.org, revised Dec 2023.

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    More about this item

    Keywords

    Arbitrage; Bounded rationality;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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